Vietnam's Free Trade Agreements - What Investors Need to Know

Vietnam's Free Trade Agreements - What Investors Need to Know

Vietnam is an open economy with extensive international integration. The country has signed and implemented several free trade agreements (FTAs) as an independent market as well as a member state of the Association of Southeast Asian Nations (ASEAN), which includes Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Cambodia, Laos, Myanmar, and Viet Nam.

In total, there are 14 FTAs that are already in effect, a signed FTA pending ratification, and two FTAs that are currently under negotiations.

Free Trade Agreements in Effect

Free Trade Agreements in Negotiation

Vietnam is currently negotiating free trade agreements with Israel and the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland). Negotiations for the free trade agreement between Vietnam and the European Free Trade Association have been carried out since May 2012. The two Parties signed an Agreement to mutually agree on the most-favored-nation status on customs duties, taxes, and other taxes related to the import, export, and re-export of goods originating as well as other related procedures.

Key highlights and opportunities

With recent trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), EU-Vietnam Free Trade Agreement (EVFTA), UK-Vietnam Free Trade Agreement (UKVFTA) in effect, and the upcoming Regional Comprehensive Economic Partnership (RCEP), Vietnam is reaching out to international trade partners outside ASEAN. These trade agreements will allow Vietnam to take advantage of the reduced tariffs, both within the ASEAN economic community and with the EU and US to attract exporting companies to produce in Vietnam and export to partners outside ASEAN.

EU-Vietnam Free Trade Agreement (EVFTA)

The EVFTA has become effective since 1 August 2020. The EU is well known as Vietnam’s fourth-largest trading partner, and since 2015 Vietnam has been the EU’s second-biggest trading partner among ASEAN countries.

The trade agreement promises to be the engine of growth for multiple industries in Vietnam as well as brings greater advantages with liberalized tariff and non-tariff barriers for European investors and exporters. 65% of duties on EU exports to Vietnam will be eliminated while the remaining will be gradually phased out over a period of ten years. Meanwhile, 71% of duties will be eliminated on Vietnam exports to the EU, with the remaining being eliminated over a period of seven years.

Businesses in electronics, textile & garment, pharmaceutical, food & beverage, as well as the automotive industry are expected to enjoy greater market access due to liberalized tariff and non-tariff barriers under the trade deal.

United Kingdom – Vietnam Free Trade Agreement (UKVFTA)

The UKVFTA entered into force on 1 January 2021. The agreement is based on the terms of the EVFTA and is one of several ‘continuity agreements’ based on existing EU trade agreements with third countries of which the UK was a member prior to its departure from the EU on 31 January 2020 (Brexit).

The UK’s departure from the EU provides an opportunity for British investors to look beyond their traditional continental markets. The United Kingdom is currently in the top 15 largest foreign investors in Vietnam, with 480 FDI projects valued at almost US$4 billion accumulated until the end of 2020. Among European countries, the UK is currently the second-largest FDI investor in Vietnam and Vietnam’s third-largest trading partner (after Germany and the Netherlands).

The UKVFTA will lay a solid foundation for a long-term partnership and bolster growth in FDI inflows from the UK to Vietnam, particularly in main sectors such as education, energy, infrastructure, and healthcare.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

The CPTPP is a new-generation free trade agreement with 11 members, including Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Viet Nam. The Agreement became effective on 30 December 2018 for the 6 countries that first finished the ratification process, including Mexico, Japan, Singapore, New Zealand, Canada, and Australia. Eight months later, Viet Nam ratified the trade deal that took effect on January 14, 2019.

CPTPP countries, comprising a number of major markets such as Canada, Japan, and Australia, account for 13.5% of the global GDP with a total trade turnover of more than US$10,000 billion. Vietnamese enterprises will enjoy highly preferential tariff reductions when exporting goods to CPTPP member countries. Specifically, the reduction of import tax to 0% for Vietnamese goods in major markets such as Japan and Canada will help boost export turnover.

Furthermore, a lot of opportunities will be opened up when a new supply chain takes shape. Sectors such as electronics, high-tech, and green agriculture will reach a new development stage with higher added value.

Regional Comprehensive Economic Partnership (RCEP)

Vietnam, as part of ASEAN, is also negotiating the Regional Comprehensive Economic Partnership (RCEP), which includes the ASEAN Member States, Japan, China, Republic of Korea, Australia, and New Zealand. This is a high-quality free trade agreement aimed at forming a comprehensive partnership between ASEAN and its six regional partners, which is also known as the ASEAN + 6.

With negotiations started in 2013, the purpose of the RCEP is to establish deeper economic cooperation between ASEAN and its partners, focusing on trading in goods, services, and investment. It is expected to eliminate about 90% of the tariffs on imports between its signatories within 20 years after the agreement comes into force. The RCEP will also establish common rules for e-commerce, trade, and intellectual property. An economic sector with a total population of 3.4 billion people, accounting for nearly 30% of global trade would be created under RCEP.

The RCEP member countries aim that this agreement will officially come into force on January 1, 2022.

Conclusion

The free trade agreements will enable Vietnam’s economy to continue shifting away from exporting low-tech manufacturing products and primary goods to more complex high-tech goods like electronics, machinery, vehicles, and medical devices. Nevertheless, such preferences are only granted if manufacturers are able to fulfill the standards and requirements set out by relevant Parties.

Vietnam’s Ministry of Planning and Investment forecasted that the CPTPP could increase Vietnam’s GDP by 1.3% by 2035, at the same time the EVFTA could boost GDP by 15%. These trade deals along with already signed and upcoming FTAs shall help Vietnam’s economy recover after the COVID-19 pandemic and ensure that Vietnam remains competitive in the short-to-medium term.

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